Dynamic Arbitrage Gaps for Financial Assets
In this paper we are concerned with the existence of a dynamic arbitrage gap that evolves out of an adjustment process for disequilibrium prices, within a complex dynamics framework which takes into account the market microstructure and transactions costs. Although this gap exhibits non linear and chaotic behavior, it doesn’t preclude effective arbitrage transactions from taking place in real markets. Moreover, it may explain much better those factors which usually impede actual perfect arbitrage. Besides, this dynamic arbitrage gap depends upon a truly financial gap that accounts for unexpected events and superior information on the professional dealers´side. In this way, we can learn much more about dynamical adjustment processes from financial assets, making the arbitrage gap instrumental to set about real arbitrage positions. Finally, the dynamic arbitrage gap could become useful when coping with financial crisis as far as some basic parameters´range of values for which the dynamics becomes chaotic could be measured in advance.
|Date of creation:||Aug 1998|
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- Hawawini, Gabriel & Cohen, Kalman & Maier, Steven & Schwartz, Robert & Whitcomb, David, 1980. "Implications of microstructure theory for empirical research in stock price behavior," MPRA Paper 33976, University Library of Munich, Germany.
- Caplin, Andrew & Leahy, John, 1996. "Trading Costs, Price, and Volume in Asset Markets," American Economic Review, American Economic Association, vol. 86(2), pages 192-96, May.
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